An analysis by consulting firm Mercer found this decrease was primarily due to adjustments based upon information released in year-end financial statements. The collective deficit of $276 billion as of February 28 is up $43 billion from the estimated deficit of $232 billion measured on January 31.
Mercer also points out equity markets rebounded in February, posting returns in excess of 4% during the month, based on the S&P 500 Index. The Mercer Yield Curve discount rate for mature pension plans dropped seven basis points during the month, leading to an increase in liabilities that offset the asset gains.
Mercer estimates these factors would have increased funded status by approximately 1% in February. However, mitigating the positive returns was information released in year-end financial statements, which showed a slightly worse funded status than previously estimated. The new data released by approximately one quarter of the S&P plan sponsors covering roughly half of the total pension obligations for these plans reduced the aggregate funded ratio by approximately 3%, for a net decrease in the month of 2%.
The newly reported numbers indicate asset values were slightly lower than previous estimates as a result of a broad market trend toward higher fixed-income allocations that occurred throughout 2013 as many plan sponsors locked in gains from their equity returns. In addition, liabilities were somewhat higher than estimated, as many plan sponsors have begun to adopt more conservative assumptions regarding how long pensioners live, resulting in increased liabilities.
“Early indications from 10-K filings [to the Securities and Exchange Commission] are that plan sponsors made some significant steps towards risk management in 2013,” says Jonathan Barry, a partner in Mercer’s retirement business, based in New York. “Some sponsors have begun to get out in front of potentially large increases that we anticipate will begin to impact pension liabilities over the next year or two. We are seeing increased interest from plan sponsors in risk transfer strategies, such as annuity purchases or lump sum cashouts in 2014, as a way of further managing the many risks to which these plans are exposed.”
Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimates are based on each company’s year-end statement and by projections to February 28 in line with financial indices. This includes U.S. domestic qualified and non-qualified plans and all non-domestic plans.
The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2013, was $1.85 trillion, compared with estimated aggregate liabilities of $1.96 trillion. Allowing for changes in financial markets through February 28, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of February the estimated aggregate assets were $1.86 trillion, compared with the estimated aggregate liabilities of $2.13 trillion.